OFFSHORE vs ONSHORE ASSET PROTECTION

The world is truly an amazing place to live, work, invest and play. That’s why this newsletter discusses current issues of offshore living and investing, and international trusts for purposes of protecting assets.

For those with more forward thinking, we discussed what international planning meanstoday, whether “offshore” is a risk management tool, and importantly, how to manage assets in an international trust, and what an international trust can do for you. There are many more topics archived on our site at Past Articles.

Today we present an interesting debate over a query about….

Protecting Assets: Offshore vs. Onshore

Unfortunately, there are some that still don’t believe in using international trusts. They believe asset protection planning can be just as effective when formed and maintained right at home.

I strongly disagree, but include this debate as today’s newsletter topic for those interested in the different arguments. What follows below is an exchange of correspondence between another attorney and me in response to his doomsayer’s position against international and offshore trusts.

But first, if you think the South Pacific is the land of milk and honey, you may be right.

For the living, five of the top 21 best quality of life places to live in the world are in Australia and New Zealand (Auckland, Sydney, Wellington, Melbourne and Perth) according to Mercer’s 2009 Quality of Living Index. But better yet, the Land of Oz government paid cash bonuses of AU$14 million to 16,000 dead people as part of a multi-billion dollar Australian plan to boost the economy…..maybe not a bad place to die either.

No comment yet from the government - or the grateful dead - maybe one and the same.

For today’s debate I refer to the US lawyer as Dr. Doom. He argues that US stateside asset protection and boiler plate trusts are most likely just as good as the offshore, international trust variety. He adds the additional benefit of staying “closer to home” in a familiar environment. The lawyer was not, in my humble opinion, particularly well-versed about international trusts in general, or asset protection planning in specific (I admit I am a little biased here), even though he was selling his services to the public in this area.

The reason I share the following exchange of comments with you is because, unfortunately, his comments too frequently reflect the same negative myths too often found in the uninformed popular media selling newspapers and magazines. This is true in the US and in other western cultures that closely follow the American model. You now get a little inside view of the issues as we express our different opinions.

First, Dr. Doom states that entering into a foreign trust increases the likelihood of an audit (a very popular myth).

My response: First, in the US, there are two types of international trusts. The first is a US domestic grantor trust. For US tax purposes, it is tax neutral and compliant-light, which is generally the type we recommend. Since this type of international trust “passes through” all tax benefits and obligations to the grantor of the trust – it is truly tax neutral - it does not generally increase the risk of a tax audit.

On the other hand, a true foreign trust (for US tax purposes) may increase the likelihood of an audit. For tax purposes it is a compliant-heavy type of trust, with significance penalties for non-compliance. I do not generally recommend this type of trust, but they have their place.

Dr. Doom, and journalists in the popular media, often make the same mistake by mixing the two up, lumping them together as the same, and failing to make an important tax distinction between the two. Most likely he, like most uninformed journalists, is unfamiliar with the distinction between the two, since he appears to promote garden variety stateside planning because it is supposedly “safer” for tax reasons.

Furthermore, Dr. Doom states that the Andersen and Lawrence cases demonstrate offshore, international trusts used for asset protection planning are ineffective, unless you are willing to go to jail to protect the assets.

My response: Both of these cases are now over 10 years old and have been beat up and talked about and long been left buried and dead ages ago. Considerable law has evolved in this arena during the past decade. These were two very extreme, high profile cases with which I am familiar (but not as our clients), and it is true both parties were jailed while trying to protect trust assets….but understanding the underlying facts clarifies the problems.

In the Andersen case, the attorney who created the offshore trust, did many things wrong. It has been argued he most likely committed professional malpractice in both structuring the trust and administering it when a problem arose. For example, the Andersens acted as trustees and protectors of their own trusts (you never want to do this), even after litigation commenced, availing themselves, the trust, and the assets to the jurisdiction of the US courts (a huge mistake).

Then, the Andersens refused to comply with a court order directed against them to repatriate assets, and thereafter resigned as trustees and protectors; ultimately they were jailed for contempt of court for refusing to comply with a court order and creating their own “impossibility” to return the assets following their resignation. The court made it clear the Andersens clearly created their own problem when acting in the capacities they did, and then resigning instead of complying with the court order …. this is why they were jailed for contempt of court.

Further, Dr. Doom forgets to tell you the FTC (Federal Trade Commission) spent huge amounts of government money in the US Courts and in the Cook Islands Courts and failed to receive any money awarded by judgment from either of the judges. Moreover, the Andersen’s attorney’s fees were assessed in their favor, and against the FTC.

In my opinion, this was not a case to cheer the Andersens to victory in holding up an international trust, since by all accounts they defrauded many innocent people through a Ponzi scheme. To be sure, the trust and the Andersens prevailed in the Cook Islands, but ultimately they entered into a settlement with the FTC and the Ponzi scheme victims.

As for the Lawrence case, the testimony and the judge’s statements in the court proceedings makes it very clear that Mr. Lawrence repeatedly lied under oath in the courtroom (hiding assets and lying about them is not a hallmark of asset protection planning), perjuring himself and committing civil and criminal contempt. Lawrence was jailed for contempt of court, and he deserved it from what I read in the transcripts.

This outcome reinforces the legal principle that one of the purposes of contempt of court is to coerce performance when performance is possible. While Mr. Lawrence is not a client of our firm (and no client of ours has been incarcerated or held in contempt), our understanding is that the $20 million dollars Mr. Lawrence protected at the last minute remains protected and in a Cook Islands trust.

The bottom line is, these two cases are terrible examples to argue that asset protection is a problem using an international or offshore trust..... like saying if you eat pork you will get swine flu. Bad facts and bad law are a poor combination to argue against the success of literally thousands and thousands, if not hundreds of thousands, of well planned and maintained trusts, established over past decades.

When creating asset protection planning structures, and international trusts in general, it is essential that it is above board, legal, and you are able to testify under oath with confidence that your intentions were strictly honorable.

Next, Dr. Doom refers to certain classes of assets afforded special protection as exempt assets under US state and federal bankruptcy laws as a good way to protect assets.

My response: He is correct; certain classes of assets are afforded protection when a debtor is forced to file for protection under bankruptcy laws. But having to file bankruptcy to obtain asset protection is not, in my opinion, a hallmark of quality asset protection either, which can be better achieved without those extreme measures.

Dr. Doom next argues a technical point about the pros and cons of provisions within trusts found around the world, giving rise to a distinction between Discretionary Trusts and Spendthrift Trusts, and the development of trust law in this regard.

My response: While these two types of trust provisions are distinguishable and have their benefits in trust planning, neither offer real protection because of the US prohibition to self-settled irrevocable trusts. In general, American jurisprudence does not favor a self-settled Discretionary Trust or a self-settled Spendthrift Trust. Interesting is how American jurisprudence has departed from its roots with the British system in this respect.

However, by going offshore, you can self-settle an international trust for asset protection, and integrate both discretionary and spendthrift provisions. Trust law worldwide originates from the traditional British trust law roots - its origins date back to the Roman armies leaving their assets in trust while going off to battle. Using an international trust allows you to accomplish what cannot be achieved with a typical trust at home.

Dr. Doom also says the US states – for example, Alaska and Delaware - offering self-settled Dynasty Trusts for asset protection are just as good, or better, than using an international trust….. besides, things are safer at home where US citizens are most familiar.

My response: Alaska and Delaware self-settled Dynasty Trusts demonstrate the US is slowly moving back towards its British trust law roots by allowing self-settled trusts for asset protection planning, and allowing Americas to do what much of the world has done for generations. Domestically, there are now approximately seven states in the US embracing the concept. While we never support the concept of international planning “stateside,” it still confirms a shift in the trend with less negative “stigma” attached.

US self-settled trusts (or any domestic trust in any other venue, for that matter) are still problematic for quality asset protection, due to many reasons. This includes conflict of law issues between jurisdictions (when multiple venue parties are involved, which law applies?); Full Faith and Credit laws (Federal laws requiring judgments in one state be recognized and enforced in another state); results orientated activist judges (increasingly a problem when judges are more concerned in results and not following the law); Fraudulent Conveyances Statutes (easy to unwind a domestic trust transfer unlike in offshore protective jurisdictions); and various "look back" provisions under local bankruptcy laws (which offshore asset protection jurisdictions do not recognize).

If anything, Dr. Doom presents a very good case that asset protection is not very good when limited to domestic planning. He just doesn’t get it.

Finally, Dr. Doom says the garden-variety “one size fits all” asset protection trust is probably just as good as the higher priced offshore models, as they will most likely scare off the creditors just as well.

My response: Asset protection ultimately stands or falls in a court room.... this is where it is tested. At the end of the day, there has been no - or very little - court challenges to US registered asset protection trusts, so the early trusts will be the test cases.

Today, too frequently, boiler plate asset protection trusts are offered by estate planners with no courtroom experience, by notching up their menu of services for their client base. Again, in my humble opinion, when someone with little or no experience in litigation tries to provide asset protection, they are now in an arena outside of their expertise and usually miss the mark where it is needed most. You have to start with litigation in mind, because that is where you can ultimately end up if, and when, you are sued.

As noted from my brief responses above, too frequently the misinformed attempt to lead the uninformed. A general medical practitioner is usually no more qualified to do brain surgery than a local general or estate planning attorney is qualified to structure an international trust. With all respect to the general practitioners, they too are specialists in their own right, but would very seldom be qualified to do international planning.

But before availing yourself to the benefits of any offshore jurisdiction, you must first start with a properly structured international trust to achieve quality asset protection. Learn how to achieve quality asset protection and how to manage assets in an offshore trust.

When I first started implementing international asset protection strategies two decades ago, you could count on one hand the number of attorneys in the US with any experience in this field, and likely have several fingers left over. Today, it seems that everyone and his brother are offering asset protection as part of their menu of services. For that reason you need to look closely when considering a planner for quality asset protection.

3rd Place: A label on the underside of a cereal bowl warns, “Always use this product with adult supervision.”

2nd Place: A wart removal product instruction guide that warns, “Do not use if you cannot see clearly to read the information in the information booklet.”

1st Place: The label is attached to a portable toilet seat for outdoorsmen called “The Off-Road Commode” designed to attach to a vehicle’s trailer hitch. The warning label reads "Not for use on moving vehicles."

If Ben Bernanke Ruled the World…..

Two of the great masters of children's fantasy fiction are Ben Bernanke (Chairman of US Federal Reserve) and J. K. Rowling (author of the Harry Potter books). Ben provided great insight into his thought process during remarks to the Boston College School of Law graduating class recently. Instead of more words of wisdom on economic theories, he treated his audience with his viewpoints about the inherent unpredictability of our individual lives and how he personally and professionally deals with these realities. His speech offers some remarkable insight into the mind of Ben Bernanke.

With a serious face, Ben proclaimed to the graduating class that “as an economist and policymaker, I have plenty of experience in trying to foretell the future.” However, he goes on to confess that “…predicting the economy is even more difficult than forecasting the weather.”

In reflecting on his life, Ben admits to his audience that he “sees a sequence of accidents and unforeseeable events.” Ben further confessed that he only inadvertently ended up becoming an economist because “Economics was a compromise between Math and English, and because an Economics professor liked a paper he wrote and offered me a summer job.”

Ben goes on to extol his theory of life to the graduating class by discussing the so-called butterfly effect, which holds that, in a sufficiently complex system, a small cause - the flapping of a butterfly's wings in Brazil - might conceivably have a disproportionately large effect - like creating a typhoon in the Pacific. As Ben’s authority for living life under the Chaos Theory, he cites John Lennon to support the proposition that "Life is what happens to you while you are busy making other plans."

Many find that J.K. Rowlings fiction is rather intriguing, and admittedly I grew up on John Lennon. But we have to wonder just what these guys in Washington are doing in those smoke filled rooms. Are we supposed to buy into Helicopter Ben’s ability to fix the global economy when he advertises that his life has been full of accidents and unforeseeable events, and predicting the weather is more reliable than his economic planning? Or when he relies upon Chaos Theory and John Lennon to explain how he arrives at his moment in history?

What is the stuff these guys in Washington are smoking? And where can I get some?

Ben’s final commencement advice to the class: “stay optimistic.”

I wasn’t able to locate any comments from the graduating class on Ben’s stellar advice, but its likely most will receive their next education in the parables of unemployment. Next year Boston College would be better off to bring in J.K. Rowlings for a commencement address instead.

You Have the Final Word…..

Recent newsletters have varied between a more serious tone about more philosophical topics with the potential for great impact in our lives, to more casual, general topics of a lighter tone on asset protection and offshore living.

Some readers have indicated they look forward to the more lengthy, thought provoking newsletters with broader coverage and materials. Others prefer the shorter “get-to-the-point” version on asset protection and offshore living and investing. Please share your thoughts with what’s important to you, as your vote counts. Your newsletter continues as a work in progress.

(Licensed to Practice Law in U.S. States & Federal Courts;
Assoc. Member Auckland, N.Z. District Law Society - Foreign Lawyer; &

Assoc. Member Queensland Law Society, AU - Foreign Lawyer)

The comments herein are not intended to constitute a legal or tax opinion regarding any specific legal or tax issue as additional issues may exist; does not reach a conclusion with respect to any specific legal or tax issue addressed herein or any additional issues not included; and cannot be used for the purpose of avoiding legal or tax obligations or penalties with respect to issues in or outside the scope of matters discussed herein.

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